Chapter 5

Working out your VAT refund or payment

Working out VAT is simple maths. Keeping track of all your transactions is the tricky part. Let’s learn the process.

A person on their phone calculating VAT

VAT is a simple formula

Unless you’re in a flat rate scheme, you’ll work out VAT by comparing the amount you paid on purchases to the amount you collected on sales.

An illustration of the VAT formula

If you get a positive number, you need to pay that amount to HMRC. If it’s a negative number, you’ll get refunded that amount.

How to work out VAT in four steps

1. Make a note of the VAT paid on your business purchases

A VAT form indicating VAT paid, and a delivery moped

2. Make a note of the VAT collected on sales

A VAT form indicating VAT collected, and some bakery foods

3. Add both types of VAT

VAT calculations

4. Run the VAT formula

Calculating VAT owed

Avoid nasty surprises with smart bookkeeping

Like any business, you’ll aim to sell more than you buy. If you succeed in doing that, you’ll most likely end up with a VAT bill. Run the four-step VAT equation regularly so you can:

  • work out how big your VAT payment is shaping up to be
  • transfer cash to a separate bank account to cover the bill

Automate your VAT calculations

You can use online accounting software like Xero to stay on top of VAT. It automatically records VAT collected and paid, and does the maths for you.

How software tracks VAT owed and collected

The software keeps a running count of your VAT situation so you always know where you stand. When the VAT period is over, you just connect to HMRC and submit your return online. All the information is ready to go.

Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.

Guide to VAT

Making a start with VAT? Don’t worry. It’s a little extra admin, but follow our guide and you’ll soon be on top of it.

Download the guide to VAT

Get your small business tax sorted. Fill in your details to get our full VAT guide as a PDF.

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